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India Pakistan Apparel Retailing Operations Roadmap

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Strategy Roadmap for Orange

Overview

This paper discusses the operational issues of a possible apparel retailing chain that operates in India and Pakistan and is looking to expand beyond.

Operations

Orange had a very successful Eid season in Bombay, but less so in Pakistan. There are several issues on our plate that need to be addressed:

* Open the restaurant and hair salon in Defence Z-block. These are important since they will generate revenue, buzz and traffic for the Z-block shop. One or both of these could be very successful and possibly be more profitable on a square-foot basis than the retail shops. However, they will both require substantial capital injections.

* Improve our marketing efforts in Pakistan to raise awareness of the Orange brand in Pakistan. Many potential buyers are simply unaware of the existence, location and content of our stores.

* Improve our merchandising efforts in Pakistan, in the light of lessons learned in Karachi and Lahore. We need to fix problems with wrong sizes, inadequate variety and too-slow turnover of garments on the shelf. Better interaction with Bombay manufacturing is very important.

* Work on our operational processes which are very basic right now. The IT systems are not connected, there is no stock-count or inventory control process, nationwide financial reporting is not in place

* Reconfigure and train the sales force. In Karachi the sales force need to be replaced. In all Pakistan stores, the sales force needs to be trained and have specific assignments. A process for tagging and stock-take needs to be implemented.

* Improve planning with Design and Production. We need to create a 12-month outline plan which shows a schedule of which garments will be produced, shipped and displayed on which dates. We also need to schedule our annual sales.

Outlook

The Bombay stores have gained a lot of traction in 2007. Based on a size of 2000 sq ft. for Red Village and 1000 sq. ft for Beachview, sales rose as follows:

Store Jan 2007 Sales per sq. ft. /day Aug 2007 Sales per sq. ft. /day

Red Village 13 25

Beachview 7 42

Karachi 5 6

Clearly, Orange has struck a chord with the buying public in India. One of our goals must be to understand what is working in Bombay, and try to translate that to Pakistan. However, differences in the Pakistan and India market make it likely that an exact translation will be Impossible. We will probably have to adapt and change a lot of things to succeed in the Pakistan market. However, clearly the process of understanding the customer, fine-tuning the product offerings and promoting the shops has paid tremendous dividends in India over the last 10 months. We need to now implement a similar process in Pakistan.

One of our immediate goals must be to build up the Pakistan shops to levels close to Bombay. If we could bring up the three Pakistan stores to a figure of Rs. 20/sq. ft/day, this would generate a lot of cash every month and significantly lessen the pressure on our capital resources. This would open up a lot of options for us including: further shops in Pakistan, advancing into the Gulf region, perhaps exploring India as well.

One more immediate option for us could also be to open additional shops in India.

Orange's strengths in Pakistan are clearly men's formal shirts. Women's apparel is doing very badly in Karachi, and is relatively slow in Lahore as well. In Bombay, the sales are more balanced, perhaps as a result of the more prevalent foreigners amongst the consumers there. This is one more reason for us to focus on opening an Islamabad shop as early as possible.

Corporate Structure Roadmap

Currently, the Orange stores in Bombay are generating excess cash while the Pakistan - and, in particular, the Lahore - stores require large capital injections. In the medium term, Pakistan has a lot of potential since it is (1) a more affluent country than India and (2) it is probably a better jumping off point from which to attempt an expansion into the Middle East or beyond.

Therefore it probably makes sense to create one corporate entity that owns the India and Pakistan stores together. This entity would (1) protect Orange resources from being eaten by IndiaTex operations (2) provide separate financial statements which would clearly show how whether IndiaTex was meeting its financial targets rather then being hidden in the shadows of IndiaTex (3) make it easier to recruit executives whose incentives could be based on Orange performance (4) work with banks and other capital sources to obtain financing based on its own balance sheet and income statement without the baggage of IndiaTex's relationships with its banks . This new entity could be based in Bombay, Karachi or a third-country such as the UAE.

The steps required to do this would be as follows:

1. Incorporate a holding company in the UAE - not sure what the requirements for this are

2. Cleanly separate Orange India from IndiaTex, including assets, bank accounts employees

3. Have the holding company acquire the Pakistan and India units - tax implications?

4. Begin to operate as a company including paying IndiaTex for products shipped and exploring third-party sourcing

Special Projects Roadmap

We should probably make every effort to start the restaurant and hair salon as soon as possible. Until these start, we are not utilizing 2/5th of a building for which we are paying 550,000 a month in rent. This is not sustainable for too long. Getting the restaurant and hair salon started will probably take capital expenses of 15-20 lakhs per unit. However, both should start contributing cash immediately if we can make even a moderate success out of them. See Appendix A to see the effect on cash flows over time.

The restaurant should be a particular priority, since it may well ramp up quickly. Estimated cash contribution should be at one lakh a month to begin with and could easily grow to 5-10 lakhs a month if the restaurant takes off and becomes a go-to place for Lahore's trendy people. The hair salon may take longer to catch on. Estimated cash contribution is 50,000 per month to begin with, and 3-5 lakhs per month if it is a big success.

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